Wednesday, June 19, 2024

Why should the US care about Chinese investment in Mexico?

For many years, Mexico watched as China received significantly more foreign direct investment from companies around the world. I recently wrote about how, based on my experience doing business in both Mexico and China, the benefits of NAFTA for Mexico were muted due to the global rush to invest in China.

Now, it appears to be Mexico’s turn as many companies are looking to invest in the country as part of the recent nearshoring and “friendshoring” boom. Already this year there have been a multitude of announcements of companies from the US, Canada, Europe nations, and Asia investing in Mexico.  Perhaps most surprisingly, there have also been a large amount of investments announced from Chinese firms in Mexico.

Just this week, the Chinese construction company LGMG announced a US $5 billion investment in Nuevo Leon.

In addition, China has begun to export a significant amount of vehicles to Mexico, and several Chinese auto companies are looking for sites to build plants in the country.

So is this a good thing for North America?

It’s a very complicated question, and the answer depends in part on how one views the relationship of Mexico (in fact all of North America) with China going forward.

Let me provide a few scenarios and present my thoughts on each.

Scenario 1:  You believe that China and North America will soon return to “normal” relations in which there is good communication, trust, and cooperation between both regions

In this scenario, I would argue that the investment of China in Mexico is a good thing for the country.  As most companies in many countries are trying to “de-risk” their supply chains, it’s only logical that Chinese companies wish to do the same.

If these companies choose Mexico as a destination for their investments, that’s a good thing for the country as more skilled employment opportunities would be created (leading to increased standards of living for Mexicans). Assuming in this scenario that good relations are restored between North America and China, the increased investment would be mutually beneficial and serve to reinforce the relationship with an increased flow of money, experience, and people – ultimately benefiting the citizens of Mexico.

Scenario 2:  You believe that China and North America will continue to have “frosty” relations in which communication, trust, and cooperation between both regions remains low

In this scenario, I would argue that Mexico should still welcome the investments from China, but take important steps to ensure that they are “value added investment”.

In other words, pushing for not just the final assembly in Mexico of components made in China, but rather an increased portion of the entire supply chain being relocated to Mexico. This would force some de-risking of supply chains by having a more significant portion made locally in North America.

This scenario acknowledges that Chinese investments in Mexico should primarily benefit North Americans, and as a result the “terms and conditions” of the investments should be more stringent. In other words, not just welcoming any form of investment from China “with open arms”, but rather with some tougher conditions.

I think that, if this is done by North American governments in a coordinated and concerted effort, this could be successful and beneficial – despite the difficult relationship with China.

Unfortunately, the United States’ foreign policy focus is largely on conflicts in Ukraine and the Middle East, and discussions with Mexico often seem to focus on immigration and drug issues.

Scenario 3:  You believe that relations between China and North America will continue to deteriorate and we are in for a long period of sharper competition and conflict

In this scenario, North American countries need to urgently get more serious and coordinated with a plan for Chinese investment into the region.

Looking at the automobile industry as an example, why would North America allow a flood of Chinese auto parts companies to come to Mexico and reap the benefits of local supply? Why would North America allow a wave of Chinese made cars into the region? And most importantly, why would North America allow Chinese car plants into the region?

Unfortunately, the discussion around autos in the United States is currently largely focused on UAW strike issues and ensuring that more US auto manufacturing doesn’t move to Mexico. If this scenario is the one most likely, the countries of North America need to urgently work together to develop policies that encourage non-Chinese companies from around the world to invest in Mexico and make it much more difficult for Chinese companies to do so.

Things are moving fast. It has been over three years since the start of COVID-19 and the beginning of a very different thinking about the North American relationship with China. Over these past three years, the relationship between North America and China has only worsened, while at the same time China has dramatically accelerated its investments in Mexico.

It is time for Canada, the U.S. and Mexico to have a coordinated policy with respect to investments from China. The existing framework of the USMCA trade agreement seems like the logical place to build this policy. It does no good for the U.S. and Canada to talk tough on Chinese investment – only to have it instead flow just across the border into Mexico. (Which is precisely what is happening right now!)

This issue could provide the perfect opportunity for further coordination, cooperation, and alignment between the countries of North America, given the quickly evolving geopolitical realities of the world.   Perhaps a recent apparent cancellation by the Mexican government of a Chinese company’s lithium mining concessions in Mexico as well as recent cooperation between the U.S. and Mexico to encourage local semiconductor investment are signs of things to come?

Which of the three scenarios do you think is most likely going forward?

Travis Bembenek is the CEO of Mexico News Daily and has been living, working or playing in Mexico for over 27 years.

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